Point Henry closure: Don't bother with the blame game

The closure of Victoria's Point Henry aluminium smelter is not our fault, and in important ways it's not US-based Alcoa's fault, either.

Aluminium is congealed energy. It takes enormous amounts of electricity to drive the electrolytic process that separates aluminium from its oxide, alumina, and there has been a seismic shift in production towards developing countries where energy costs are lower.

Four decades ago, the United States, the USSR and Japan accounted for almost 60 per cent of aluminium production. Today, China accounts for more than half the global total. The big four producers from 40 years ago have a share of just over 10 per cent.

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China is in effect subsidising its aluminium production. The industry is a means to an end: smelters and electricity generating capacity have been developed in tandem, locking in cheap power for the smelters, but also extending China's power grid, and opening up new parts of the economy for industrialisation and economic development.

The shift in aluminium production away from the developed world to the developing world and to China and particular kept a lid on aluminium prices as energy costs rose, however. Profits on aluminium smelting have been squeezed, forcing smelter closures around the developed world: Point Henry is only the latest, and it will not be the last.

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Australia continues to be a competitive location to mine aluminium's raw material, bauxite, and refine into alumina, the feedstock for aluminium smelters.

Rio Tinto announced last December that it would close it alumina refining operation in Gove in the Northern Territory, but it is continuing to mine bauxite there. Alcoa says its bauxite mining and alumina refining businesses in Western Australia will continue to operate.

Hundreds of jobs will be lost when Victoria's Point Henry aluminium smelter closes. Photo: Arsineh Houspian

However, in Victoria, where the industry is concentrated on smelting, the focus will be on the Portland aluminium smelter, 55 per cent owned by Alcoa and its Australian listed aluminium joint venture partner, Alumina.

Portland is about twice the size of Point Henry, and therefore has better economies of scale. It also has long term power supply contracts, negotiated originally with the Cain government in a deal said at the time to have created the world's longest extension cord, and renewed in 2010 with the owners of the privatised Loy Yan A power station in the Latrobe Valley.

Nobody will be making promises given the upheavals in the global industry, however. Alcoa posted a $US2.34 billion loss in the December quarter as it wrote down the value of old smelting assets. Rio Tinto paid $US38 billion for the number two global producer behind Alcoa, Alcan, in 2007, and has since announced writedowns of almost $US30 billion. And the metal's global prospects are also tied to energy prices, and the policy response to climate change. There are no safe bets here.